Research Summary
- Liquid staking in the crypto sector has achieved a unique product-market fit by solving the capital efficiency problem faced by Proof of Stake (PoS) blockchains, resulting in the largest Total Value Locked (TVL) of $22 billion in DeFi.
- The liquid staking market grows with the value of the chains it serves, generating over $800 million in annual revenue from the top 5 smart contract chains, with earnings superior to other DeFi sectors due to their recurring and non-volatile nature.
- Lido, a leading liquid staking protocol, is well-positioned to capture industry growth with strong network effects around stETH and a track record of reliability. A potential 3x opportunity in Lido’s revenue is seen in the medium term.
- Liquid staking protocols present stakers with the ability to generate yield and liquidity on staked assets, solving the capital efficiency problem. The sector’s consistent revenue source is considered a strength amidst a volatile market.
- Lido’s revenue has been consistent without major fluctuations, demonstrating the stickiness of staking revenue. It is currently the market leader in liquid staking with almost $15 billion in TVL and is expected to continue its dominance.
- Factors contributing to Lido’s growth include the growth of underlying L1s, Ethereum’s staking ratio growth, staking yield growth, liquid staking market share growth, and Lido’s value capture. Multichain operations are viewed as a call option on the growth of alternative L1s.
- Lido’s stETH is the most liquid staked ETH derivative, and its liquidity is further enhanced as more utilities of the token become unlocked. Lido’s potential market opportunity includes expectations of Ethereum staking ratio hitting 30% within the next 12 months and a 5x revenue growth opportunity.
- The report concludes with optimism about the prospects of the liquid staking sector and Lido’s continued dominance due to strong network effects around stETH. The market’s deviation in valuations and fundamentals is seen as temporary, with Lido offering some of the best risk-adjusted returns in crypto.
Actionable Insights
- Investment Opportunity: Lido’s consistent revenue, strong network effects, and potential for substantial growth present a compelling investment opportunity with a 5x revenue growth prospect.
- Industry Growth: The liquid staking sector’s unique value proposition and ability to solve capital efficiency problems indicate a long-lasting demand and potential for further expansion.
- Strategic Diversification: Lido’s multichain operations and dominance in the liquid staking market provide a prudent means of diversifying business and capturing growth across various chains.
- Market Dynamics: Understanding the key drivers of liquid staking, including the growth of underlying L1s, staking ratio, and yield growth, can guide strategic decisions in the rapidly evolving crypto landscape.
